With just days remaining until 2021, shares of DocuSign (NASDAQ:DOCU) are up over 200% on the year, boosting the stock's total return to 480% since its early 2018 IPO. That impressive performance could be far from over, though.

DocuSign is a big company now, with a market cap currently hovering just below $43 billion, but the e-signature leader is picking up lots of new customers and finding new applications for its technology. Don't write off this software stock because of last year's run-up. 

A one-time pandemic bump?

DocuSign's business is simple to understand: It pioneered the e-signature, and it is now responsible for the automation of agreements and digital transactions for some 820,000 paying customers globally, with millions of users. 

With the world suddenly shoved further into the digital realm thanks to COVID-19, it's no surprise DocuSign had a big year. Many organizations caught dragging their feet on "digital transformation" had to scramble to keep their operations rolling when the lockdown started in spring 2020. For DocuSign, the result was a surge in activity for its software-as-a-service (SaaS) subscription business during fiscal 2021 (the 12-month period that will end Jan. 31, 2021). 

Two people pictured off screen signing using a tablet.

Image source: Getty Images.

To be fair, DocuSign was growing fast even before the pandemic. But this bump in sales without a commensurate boost in marketing spending has been a boon for the company. Revenue growth accelerated, and free cash flow (revenue minus cash operating expenses and capital expenditures) grew at an even faster rate. 

Period

Revenue

Revenue Growth (YOY)

Free Cash Flow

FCF Growth (YOY)

Fiscal 2020

$974 million

39%

$28.2 million

(38%)

Q1 2021

$297 million

39%

$32.8 million

8%

Q2 2021

$342 million

45%

$99.8 million

739%

Q3 2021

$383 million

53%

$38.1 million

170%

YOY = year over year. Data source: DocuSign.

DocuSign has a couple more quarters before it starts to lap its pandemic-fueled performance, and there is (warranted) concern that growth will moderate dramatically once that happens. However, the result of the recent increase in revenue means DocuSign has more customers than ever and plenty of cash to further its expansion. As of the end of October 2020, the company reported cash and equivalents of $599 million and long-term investments of $76.8 million, offset by convertible debt of just $486 million. 

Don't sweat the premium on this new office staple

Given its recent performance, it's no wonder DocuSign trades for a hefty 32 times trailing 12-month sales. And since most cash generated is plowed back into marketing and other expansion efforts, valuing this company using free cash flow or some other profitability metric isn't particularly useful either. Is it worth the premium?

I'm assuming DocuSign's growth rate will slow substantially next year, so this isn't my favorite SaaS stock at the moment. But for investors looking beyond 2021, there are ample reasons to be excited about this company. E-signatures can be applied to plenty more use cases in the ongoing war against paper -- like notary services, which DocuSign expanded on this year with the acquisition of small notary technology firm Liveoak. DocuSign is also an early adopter of blockchain (the technology behind cryptocurrencies like bitcoin), securing digital documents and signers using digitally stored credentials. This development alone could open the door to plenty of other applications involving e-commerce, digital payments, banking, and work contracts.

Put another way, DocuSign is an "expensive" stock, but for good reason. It was an early pioneer of e-signatures and remains at the forefront of a growing "digital agreements" industry. The ride could get bumpy next year as the company starts to lap the bump it got from the COVID-19 pandemic, but the future still looks promising. For investors interested in holding for the long-term (no less than a few years), this remains a good buy in 2021.